Co-opetition with hyperscalers – a balancing act for telcos

hyperscalers 5G
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After a decade in which the top line of the telecom industry remained constrained and which was characterized by a “running to stand still” mode, the industry is at an inflection point as it postures itself for future growth or struggling for cost recovery.

Unless communications service providers (CSPs) are able to reinvent themselves as successful 5G stakeholders, they are projected to miss out on the growth that the new generation of mobile network technology has to offer. All the more as many other players – including hyperscalers such as Amazon Web Services (AWS), Microsoft and Google – have 5G ambitions as well, with some of them even spreading their tentacles to the network space putting them in ‘enemy’ territory.

According to a report from Greensill, 5G infrastructure upgrades will need global investment in the neighbourhood of USD 1 trillion. And CSPs will bear most of the costs for deploying them. The percentage of services revenues that CSPs must allocate to recoup 5G network investments may rise precipitously from approximately 12-15% in the 4G era to around 40%.

Funding of infrastructure upgrades can no longer rely on a consumer-centric strategy. CSPs cannot expect enhanced 5G mobile broadband alone to create significant additional revenue. The greatest potential for CSPs to generate revenue from 5G is in industry applications, including the IoT.

Many CSPs are looking at 5G with network slicing and edge computing as a good opportunity to leverage their existing assets and resources to innovate and move up the value chain. They aim to expand their services and revenue beyond connectivity and to enter the platform and application space. By deploying computing resources at the network edge, CSPs are able to offer applications and solutions for enterprises.

IBM recently conducted a survey on 5G and 5G-enabled edge computing among 500 CSP executives across the globe, and identified a group of high performing CSPs, outperforming their peers in revenue, profitability, and innovation in the past three years. The survey did offer insights into how to leverage strengths and develop competencies to unlock new economic 5G opportunities in the enterprise area.

As shown in Figure 1, the survey revealed a significant difference in attitudes between the high performers – let’s call them the CSP leaders – and their peers relating to the sources for ROI that they anticipate across network tiers, with CSP leaders generally seeing more value at the edge of the network and other CSPs seeing more in the network core.

However, forward-thinking CSPs need to develop a strategic approach to capture the value at the edge fast, otherwise, they could risk losing their share of the growing market to non-telco first movers, not least to the hyperscalers who are now at the forefront of the edge computing market.

Hyperscalers are moving at a striking scale

While CSP leaders look to realize their ambitions and roles beyond connectivity, hyperscalers are expanding their involvement in the telecoms industry/value chain, including in edge computing and private networks.  

Hyperscalers have the digital platform economic advantage by acquiring market power through their platforms that serve as collaboration junctions. While CSPs spend disproportionally on networks (in 2020, telecom CapEx was about 2.2x that of web-scale companies, according to research from MTN consulting), hyperscalers earn disproportionate profits and realize most of the market value (in 2020, the total market value of the top 10 web-scalers was about 4x that of the top 10 CSPs). An advantage that is likely to grow as 5G and edge computing unlock new value, with 5G infrastructure cost mainly borne by the CSPs.

Hyperscalers continue to benefit from the massive economies of scale they have built. In particular the three top players in the market for hyperscale cloud computing services – AWS, Microsoft and Google – have the resources, momentum and stamina to outperform all others. In 2020, these three hyperscalers controlled 70% of the public cloud market. They plan to capitalize on the accelerated enterprise migration to the cloud and to dominate the enterprise IT spend by expanding their offerings beyond infrastructure services to full-stack capabilities.

In that context, hyperscalers are seeking new growth opportunities from 5G edge. They are rapidly increasing their presence in the edge computing market by launching dedicated products, including Wavelength from AWS, Azure Edge Zones from Microsoft and Anthos for Telecom from Google. With these products, they are aiming to use edge computing to power numerous AI and 5G applications and services for enterprises.

Hyperscalers are further strengthening their telco ambitions with some of them launching their own private network solutions. Microsoft bought Affirmed Networks and Metaswitch, with the first geared towards selling LTE and 5G core network solutions to operators, and the second selling the same to enterprises via its Azure portfolio, in fact delivering enterprise-grade private networking.

December 2021, AWS launched its own private 5G solution, consumption-based with pricing determined by coverage area and bandwidth. Initially targeting the US, but likely to be expanded into other national markets. No doubt, other hyperscalers will jump on the bandwagon of enterprise-grade private networks as well. This all puts the hyperscalers obviously in the CSP domain.

So, where does this leave CSPs?

Since the revenue from what were once core services (mobile voice, SMS and the like) has significantly shrunk – due to alternative services from web-scalers and regulatory pressures – CSPs have been desperately in search of alternative revenue sources. However, the 2010s was a decade of lost chances for CSPs to grow strong again. They clearly missed out on mobile application opportunities. Also in the cloud space, where many CSPs thought they had an advantage because of their central office/switching centers. But many CSPs abandoned their public cloud efforts years ago, as it seemed hard to compete with the hyperscalers.

More than ever, CSPs are under severe pressure due to increasing costs and a flat five-year revenue forecast. CSP leaders, therefore, focus on 5G and edge infrastructure to unlock the so needed new revenue streams. It is an opportunity that particularly the larger CSPs can’t afford to miss. But to capture this potential, they need to transfer their networks into flexible business service platforms.

Operating as a platform will enable CSPs to open up new lines of revenue by selling directly to enterprises, developing networks that can be adjusted based on specific customers’ devices, locations and network needs. And, by recapturing the relationship with enterprise clients, CSPs can also garner insights and have the flexibility to deploy new applications and offerings that unlock new use cases across industries.

CSPs have important competitive advantages. In particular, the points-of-presence they maintain represent trillions of dollars in global investments and are needed by any party seeking to deploy applications and services at the network edge. And they have extensive experience in operations and the understanding to manage vast networks that provide essential services. They also maintain a powerful position of trust with end-users for billing purposes, packaging and staging complementary applications and technologies.

Enterprises, though, may not perceive that CSPs have the specialized knowledge and skills to add enough value to industry-specific solutions. BearingPoint’s recent research found that only one in five early enterprise 5G deals were CSP-led. In some early deals, CSPs were cut out entirely, with even connectivity provided by other players. This observation indicates a clear urgency for CSPs to go for partnerships.

Partnerships with hyperscalers – Near time opportunity, long term threat?

Many CSPs in IBM’s 5G and edge computing survey are contemplating whether third-party public cloud companies are friends or foes. The survey revealed that far more CSP leaders than their peers – 51% compared to just 22% – agree that they must partner with public cloud companies to grow revenue and profits from 5G edge (see Figure 2). At the same time, 74% of CSP leaders say that partnering with them would mostly benefit the strategic interests of these public cloud companies.

There are very good reasons for CSPs to partner with hyperscalers. CSP leaders acknowledge that even if they own the edge ‘clouds’, these will still need to be supported by hyperscaler clouds to create a distributed cloud. In addition, enterprises will likely trust hyperscalers above CSPs to provide a robust environment for developing industry-specific applications. On the other side, enterprises have long trusted CSPs for their reliability and security. So, partnering should benefit both.

Partnerships between CSPs and hyperscalers are starting to take place and shape the market. For instance, Verizon built its own edge platform and ecosystem with the flexibility to manage multiple hyperscale partners for different needs, including AWS Wavelength, Microsoft Azure and Google Cloud. Vodafone was the first CSP in Europe to enable organisations to create pilot edge applications using Multi-access Edge Computing (MEC) technology with AWS Wavelength. Many other Tier 1 CSPs have welcomed these kinds of partnerships as well.

However, there are reasons that CSPs should be cautious in relying too heavily on the hyperscale cloud companies as many initiatives do much for the hyperscaler, but less for the CSP. And as a digital platform operator, hyperscalers define the rules and tools, control the backends for the interaction with third parties, and in principle have access to the data, which they can use to train lucrative AI/machine learning models. And last but not least, with these companies investing heavily in acquiring network functions into their clouds, they have the potential to further disrupt the telecom services market, as they did before.

Therefore, CSPs should retain a competitive spirit while collaborating. They should develop clear strategies on how to use these partnerships but be aware that, as markets grow and change, so do the stakeholders’ strategies and relationships between them.

Written by Rob van den Dam, Van den Dam Telecom Consulting

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